Latin America remains our favorite Emerging Market region. Sharply accelerating profits, supportive leading indicators, and bargain valuations make Brazil and Latin America overall seem very attractive. At the other extreme, Chinese equities (our favorite from 2019 to early 2021) appear very unattractive because of peaking profits growth, expensive valuations, and a weak liquidity backdrop.
- Brazil’s profits growth is now faster than China’s! Corporate profits growth in Brazil recently surged past that in China. We expect growth to peak for both countries in the second half of the year, but strong leading indicators suggest more resilient growth in Brazil than in China. Government policies in China might also hamper future profits growth.
- Brazil stocks remain a significant contrarian play. Brazil stocks trade cheap to history whereas China stocks are We suspect Brazil stocks will reprice higher as investors gain confidence in the recovery.
- Liquidity turning uncertain. Liquidity within Brazil and China could be changing and needs close China’s credit impulse growth turned negative this spring, but recent policy looks more neutral. Brazil, however, began to incrementally tighten policy this year.
As the global economy reopens and as growth matures, investors find themselves looking outside developed economies for opportunities. One of the challenges, however, is that although there have been periods of synchronized growth across many Emerging Market countries,
“EM” consists of 27 different countries – each with its own economy, set of risks, and market exposures. As part of a global equity allocation, differentiating between Emerging Market countries is increasingly important when fundamentals diverge. Currently we see opportunities within Latin America – especially Brazil – as tailwinds for growth remain supportive and equities still appear cheap. China, on the other hand, is increasingly facing headwinds from slowing liquidity and drivers of growth.
Profits Growth Looks Poised to Diverge in 2H21
Brazilian versus Chinese profits growth is just one of several areas that highlight all Emerging Market countries are not created equal. For example, Brazilian trailing four-quarter profits have grown 94% year-on-year and have been accelerating at among the fastest rates globally, while those for Chinese companies – still increasing 9% in Q2 – have slowed relative to the rest of the world. Although it would be easy to dismiss the Brazilian growth dynamic as driven by 2020 base effects, we have found that markets consistently focus on the change in earnings growth – “better” or “worse” – and less on whether that growth is driven by easy comparisons.